Financing a Car: Pros and Cons of Auto Loans

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A small number of people have enough money saved to pay cash for a new car. If you’re not in that group, what are your options?

Financing a car is one of the most popular choices for people who need to purchase a car but don’t have the cash to do so with one lump sum. Although 85 percent of new cars are financed, your decision shouldn’t be final without some research.

This will serve as your guide to the pros and cons of financing a car, giving you a great idea of what to expect from an auto loan.

Basics of Financing a Car

Why would you want to finance a new car?

Oftentimes, buying a used car can be a risky process. If you’re not well versed in the automotive industry, you could be dumping more money into a used car than it’s worth over the years. This is where financing a new or “gently used” car with low miles becomes your best option.

If you’re not familiar with the process of financing a car, here’s a quick refresher course.

The auto loan process begins when a financial institution lends you the money needed for you to buy a car. Once the terms are finalized, you will pay the lender interest and sometimes additional fees to borrow the money over various lengths of months.

Usual car financing options are completed through a traditional bank, online lender, credit union, car dealership, or another finance company.

To get the best rate, shop around and apply for a car loan. Once approved and locked into a financer of your choice, payments are split into two parts:

  • Principal payment – payments directed toward your loan balance
  • Interest payment – payments directed toward your interest due

What to Consider When Financing a Car

Each loan is constructed in a way that reflects the car’s purchase price minus any trade-ins or down payments you’re providing, the annual percentage rate (APR), and the loan term. All of these specifics we’ll get into later in this guide.

Understand the Cons of Financing

Before we list the pros of financing a car, let’s discuss the negatives and make sure they don’t immediately change your expectations.

One of the most frightening parts of financing a vehicle is the depreciation costs of buying a new car. Depreciation, or losing value over time, happens as soon as you drive the car off the lot.

Depending on the vehicle and the brand, depreciation happens at different rates and may significantly decrease over time. For example:

  • Lowest depreciation: Jeep Wranglers – 9.2 percent over five years
  • Highest depreciation: Nissan LEAF – 65.1 percent over five years

Trucks and truck-based SUVs often hold their value the best, while luxury sedans and electric cars see the highest level of depreciation.

Another con to financing is the interest that accrues with an auto loan. Like most types of loans, interest costs will result in paying more than the amount you took out on the loan over your agreed time frame. Interest paid depends on credit history, score, and the financial company you’re borrowing from. A $14,000 loan could end up costing you $17,000 once your loan is paid off.

Financing also brings payment issues a borrower may not be ready for if they haven’t done thorough research. Rationalizing a higher payment for a luxury car is a trap borrowers fall into more often than not. Although you believe you can afford the car, the frugality of cutting costs in other areas of your life can be difficult.

There is also a financial risk to your insurance when you finance a car, especially if it’s a nicer, newer vehicle. You may be required to pay additional money to your insurance depending on certain companies.

All of these cons are not to say you shouldn’t consider financing a car. Everyone’s financial situation is different and there are plenty of pros to consider if the cons aren’t a concern.

Understand the Pros of Financing

Auto loans are a great way to get you in the car you want without paying a large sum of money upfront.

Typically, the shorter the agreed-upon car loan, the better the interest rate you’ll receive. Although this is a good option, most people choose longer loans so they can afford the payments of a new car.

Financing a car is broken up into 12-month increments between two and eight years. Common loan terms are 24, 36, 48, 60, 72, and 84 months. As mentioned above, choosing a shorter loan locks you into a larger payment but the faster you pay your debt the less total interest you will develop over time.

When it comes to the pros and cons of financing a car, the biggest pro is obvious; affordability. These low monthly payments, whatever they may be, make buying a car easy. You’ll likely be driving a car off the lot you would have never been able to afford with cash alone.

Another pro of financing is access to better vehicles. Although a lot of used vehicles are also financed, auto loans offer you the ability to get your hands on these better-quality vehicles without much hassle.

As you are making payments, an auto loan also helps with developing and building your credit. A high credit score is beneficial for multiple things, loan approval, mortgages, and a better chance at approvals in the future. On-time payments and making extra payments can be a beneficial life move once your car loan turns into a steady payment habit.

Financing a car is a great option if you keep it affordable. Overstretching your means will only lead to the negative effects of spreading your money too thin.

Looking for an Auto Loan?

If you’re looking at financing a car, get approved in a matter of minutes through the LendingArch network of dealers across Canada.

Carsfast is an auto finance network that specializes in helping people with all types of credit to get approved fast. Bad or limited credit history shouldn’t stop someone from getting reliable transportation.

To get started, visit our website today and complete our simple application process. Getting a car loan is as easy as applying, getting approved, and shopping.

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